Happy Hour Speculation

By

Alan Abelson

Updated Oct. 4, 2004 12:01 a.m. ET

Order Reprints

Print Article

Text size

LINCOLN AND DOUGLAS, IT WASN'T. But considering it was deliberately designed more as a candidate-protection program than an honest debate, the 90-minute first installment of the mini-series, "Bush versus Kerry," wasn't the total yawn we had every reason to expect.

It's true both our dogs quit the room barely three minutes into the exchange. But they're inordinately exacting viewers. We've also noticed there's something about the mere sight of a politician that invariably sets them to growling, presumably an atavistic response to the presence of a predator.

Our own sensibility has been steadily ground down over the years, not yet to the point where we can stomach the likes of Donald Trump on the tiny screen, but certainly to where we get a measure of pleasure from watching the two candidates swipe at each other and, in their mandatory two minutes of silence, squirm with visible discomfort. Our pleasure is manifoldly increased by viewing the verbal grappling via C-Span, which sedulously avoids even a drop of commentary, thus relieving us of the recurring pain of being told what it was we have just seen.

The biggest complaints about the pair of combatants -- Mr. Bush's tendency to be what someone memorably called economical with the facts, and Mr. Kerry's tendency to espy and occasionally embrace both sides of any issue -- were in evidence, to be sure. But what was more striking was the contrast between the President's listlessness and Mr. Kerry's intensity.

One logical explanation for Mr. Bush's lack of animation, we suppose, is that there's an inherent insularity about the office, constructed, as it has been by design, to wall him off from agitation and criticism. That makes a President impatient with give and take, even when tightly formatted. Or, perhaps, it's that Mr. Bush, confident of reelection, is bored with the ritual debates.

By the same token, Mr. Kerry's intensity may spring in good part from desperation. He knows he's a fair piece behind in voter esteem, and what seems to be heightened vitality is simply a rush of anxiety. Or, maybe, while waiting in the wings, his wife -- discretely, of course -- kicked him in the shin.

By lopsided margins, the post-debate soundings declared Mr. Kerry the victor. His edge, according to the pulse-takers at ABC was 45 to 36; at CBS, 43 to 28; and at CNN 53 to 37.

Wall Street, which is overwhelmingly pro-Bush, reacted to these post-debate tallies with commendable equanimity. Of course, Wall Street inevitably greets adversity with calm (as witness the fact that brokers no longer jump out of windows after market crashes, although, admittedly, that may have something to do with the fact that windows in most brokerage offices no longer open.)

In any case, the Street conducts its own running opinion poll, a.k.a. the stock market. And, right from the opening bell on Friday, stocks rallied briskly. The first-blush conclusion is that the brokers, bankers et al. inexplicably had been won over to the Kerry cause. More likely is that their political receptors are about as keen as their investment moxie and they assumed the President had won hands down, especially after Mr. Kerry used a couple of words that sounded foreign (they actually contained more than one syllable, which is just as bad, come to think of it). Most likely of all, they blew off watching the debate in favor of something more compelling, like a wrestling match.

It may just be that the stock market chose to ignore the goings-on in Miami and, instead, was celebrating the end of a not very rewarding quarter, with the Dow, the S&P 500 and the Nasdaq all losing ground, especially the Nasdaq, which was off more than 7%. So this may have been simply a good-riddance rally. And adding to the upswing was the hope, even expectation that everything -- the election, the economy, the stock market -- will come up roses in this new and final quarter of 2004.

Why not? And, since this is happy-hour speculation, why shouldn't the Red Sox take the World Series as well?

ELECTIONS, DEBATES AND SUCH TRIVIA APART, what really gave the market a lift was the third and definitive report on second-quarter GDP by the Bureau of Economic Analysis that showed it grew by 3.3% instead of the preliminary estimate of 2.8%. To investors, that was plenty excuse enough to party.

Spoilsports, ourselves very much included, who troubled to pry into the details of the better number might be inclined to feel the enthusiasm it evoked was a mite exaggerated. For the main contributors to the revised increase were exports, housing and inventories. All three are somewhat problematic -- housing continues to look toppy, exports might easily slacken even while imports mount, and we have a hunch that a large chunk of that higher inventory was not intentionally accumulated.

Meanwhile, final sales in the quarter were flat, as was disposable personal income. And consumers, alas, far from spending with their old gusto, displayed an unwonted reluctance to part with their money. In other words, on closer inspection, the bright spots in the latest version of June- quarter GDP seemed transitory or only surficially bright, while the key readings remained rather glum.

The consensus, for what it's worth (and we don't think very much) now anticipates a third-quarter showing at least as good as 3.8%. Forgive us if we hold back the hoorahs until the actual figures come out. But, more important, the current three months, we suspect, will prove a grave disappointment to the incorrigibly cheerful crew that prescribes the conventional economic wisdom.

All of which leads us to the latest ruminations of Pimco's William Gross, our newest Roundtable addition, which offer some very relevant and worthwhile comments on inflation, the measuring sticks the government uses to measure it and the resulting impact on reported GDP. Not to keep you in suspense, Bill is not entirely taken with the way Uncle Sam calculates the rate of inflation, as you might possibly glean from his labeling it a "con job." He has particularly unpleasant things to say about such artifacts of the fudge factory as " hedonic adjustment" and "substitution bias," absurdities that in a modest fashion we've railed against at one time or another.

For those who have remained innocent of such vile practices, Bill explains substitution bias is a maneuver executed by the Bureau of Labor Statistics that follows "your preference for Chicken McNuggets vs. a Quarter Pounder." More specifically, the reasoning here by the BLS is that when the price of beef rises you happily switch to chicken and, contrariwise, when the price of chicken rises, you can simply go back to beef. For someone who finds a medium rare T-bone the epitome of culinary nirvana, the suggestion that a chicken wing is just as good, is pure sacrilege. But that repugnant hypothesis keeps meat prices (or any other kindred item amenable to substitution) nicely subdued and the Consumer Price Index beguilingly tame.

Hedonic adjustment, as Bill observes, is based on the innovative notion that "if the quality of a product got better over the past 12 months" then it really didn't go up in price and "in fact, it may have actually gone down." By way of example, he cites the price of desktop and notebook computers, which in the real world declined by 8% a year over the past decade. Because computer power and memory have improved, however, the hedonically adjusted price of the machines dropped by 25% a year since 1997. Need we say such hedonic magic has performed wonders in keeping the core Consumer Price Index numbers in check ("core," in case you're wondering, excludes such uninteresting items as food and energy)?

Bill points out that hedonic adjustments are a relatively recent phenomena, introduced "to buttress Greenspan's concept of our New Age Economy." They have grown like Topsy to encompass consumer-electronic stuff, appliances, even college textbooks, until no less than 46% of the weight of the CPI is subject to such adjustments.

He remarks that the dubious reckonings may serve Mr. Greenspan well, but by falsely suppressing the real rate of inflation they do serious disservice to all manner of decent folks, including recipients of Social Security and private pensioners as well, whose monthly checks are pegged to the cost of living; to buyers and holders of TIPS -- inflation protected securities -- and, for that matter, all owners of Treasury obligations, who are deceived into thinking "they're earning a real return over and above inflation."

The bottom line, Bill says, is the CPI is probably something like 1% higher than the official data would have it, and that means, obviously, that GDP is correspondingly 1% lower. Consumers, in truth, have been paying more than they are led to believe, savers are getting less of a return than they think and the economy has been growing with appreciably less vigor.

A kindly soul deep down, Bill adds that none of this may be "a conspiracy, but it's definitely a con job foisted on an unwitting public by government officials who choose to look the other way or who convince themselves that they are fostering some logical adjustment in a New Age Economy dependent on the markets and not the marketplace for its survival."

Amen, brother!

TAKE A MOMENT, IF YOU WILL, to study that plain vanilla but elegant chart that enlivens these scribblings. It is the handiwork of the estimable Ray Dalio, proprietor of Bridgewater Associates. And what it depicts is, depending on your point of view, the decline and fall of honest labor or the triumphant ascendancy of capitalism's finest. More specifically (if less grandly), it shows the percentage of this proud nation's profits going to the financial and manufacturing sectors.

As you can readily see, since the end of World War II, the distribution of corporate profits between these two slices of the economy has been inexorably changing, with the money shufflers, as Ray calls those engaged in financial activity, steadily gaining share of the pie, while those who make big ugly things that rust in the rain, and any kind of product you can feel, wear or use, consigned to a steadily shrinking share.

What a contrast to the good old days of the 'Fifties and 'Sixties, when money-shuffling accounted for a measly 15% of corporate earnings and manufacturing a formidable 50%. Ray, with a little sigh, observes that the change is all too evident in who lives in the big houses in the exclusive neighborhoods and shops at the expensive stores. Once it was the captains of industry; today, it's the money shufflers.

He even identifies a hierarchy among the nouveau riche: at the top are bankers, investment bankers and their Wall Street colleagues, along with the upper crust of the hedge-fund and private-equity gang.

Ray explains this distressing growth of largess among people who labor in money rather than in things by the unyielding rise in financial assets and liabilities over the years, a rise that has far outpaced GDP as a whole, and the more lucrative fields of finance cultivated by investment types. He does point out that the only inhibiting element in the fabulous growth in profitability per money shuffler has been the rapid growth in their numbers.

"That's the great thing about capitalism," he reflects sardonically. "It allocates resources so efficiently. So rather than turning out doctors, engineers, teachers, architects and others involved in the old economy, our system has met the increased demand for money shufflers via an increased supply."

But don't despair. Ray, a confessed money shuffler himself, is convinced this can't go on forever.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.